Market segmentation: a strategic analysis and positioning tool
This article focuses on the nature and importance of market and customer segmentation, an aspect of strategic analysis which is covered within Section C of the Strategic Business Leader syllabus.
An important aspect of this part of the SBL syllabus involves consideration of a wide range of internal and external factors which influence an organisation’s strategic position and ultimately its strategic direction. One such consideration is the organisation’s market and customers (both current and potential), in order to take into account their different needs and to ensure that marketing is as efficient and effective as possible.
Why is market segmentation important?
Segmentation of an organisation’s market is the foundation of a successful marketing strategy. Instead of using a ‘one size fits all’ approach to marketing campaigns, use of a tailored marketing mix, designed to suit more individual customer needs, should help to drive a more personalised, relevant and a more effective marketing message which is more efficient in terms of time, money and resources. Organisations which understand that their customers have individual needs, preferences and behaviours, are better able to develop stronger relationships with customers and therefore, importantly are more likely to retain them.
Market segmentation versus customer segmentation
Market segmentation involves splitting a market into segments and developing different strategies for those segments. For example:
- Marketeers use market segmentation in planning (for example, some soft drinks producers manufacture some of their products specifically for the diet segment).
- Media companies use segmentation as a tool to assist in efficient media buying, for example, such as purchasing in-game ads to target teenagers or purchasing day-time TV advertising slots to target retired people.
- Insurance company call centres use segmentation to identify ways to adapt their sales scripts to different customers, based on age, gender, interests etc.
- Retailers use segmentation to identify which items to place next to others on their shelves.
- Pricing departments use segmentation to identify how to optimise the amount that customers will pay (for example, train companies offering discounts to students to travel at off-peak times).
Customer segmentation is the same basic idea as market segmentation, except that the scope is limited to the organisation’s own customers. Typically, customer segmentations are based on data held in an organisation’s own internal databases. Customer segmentation involves breaking down an organisation’s customer markets into homogeneous groups, each of which will react differently to pricing, promotions and other elements of the marketing mix. Each customer segment identified should be targeted with an individually designed marketing mix.
Types of market segmentation
- Age, gender, marital status
- Ethnic group
This is normally the easiest form of segmentation, as this information is easy to gather and is relatively inexpensive to obtain. However, it is most often used together with another type of segmentation to help narrow the target market even further.
- Frequency of product/service use
- Brand loyalty
- Transaction behaviour (such as price sensitivity)
- Online shopping behaviour and habits
Behavioural segmentation assists organisations to understand how a customer interacts with the product/ service, meaning that it can target them more effectively by knowing how they are likely to react towards product/service or marketing message.
- Country or region
- Rural or city based
Although a basic form of segmentation, it is often a highly effective form of market segmentation. Understanding the location of a customer can help an organisation understand customers’ needs. Understanding regional differences driven by factors such as culture, climate or language can allow for a more targeted marketing message.
- Social status
This form of segmentation focuses on the emotional or psychological behaviours of customers, where customers are grouped according to values, personality traits, attitudes, lifestyles and interests. This gives an organisation useful insight into customers’ needs and preferences. Organisations will often combine demographic and psychographic customer analysis when undertaking customer segmentation, in order to develop a richer and fuller picture of their customer segments.
Benefits of market segmentation
Satisfy customer needs
It is possible to satisfy a range of customer needs with a relatively limited product/service offering, by using different incentives, promotional activities or product/service bundles. For example, digital TV service providers offer a range of bundles and incentive plans based on different customer usage, preferences and interests. The underlying product/ service is the same, but its offering is adjusted to meet the needs of different customer segments. This should help to increase focus on that customer and ensure retention.
Even if an organisation’s product/ service features are identical for each segment, it still remains important to communicate in a targeted and specific way to each. By targeting the message, it allows the organisation to highlight the features which are most relevant or important to each segment (such as price, reliability, availability and prestige). For example, a car manufacturer may target one set of drivers with marketing messages relating to performance and speed of a car model, whereas they would target another set of drivers with marketing messages related to reliability and design of that car model.
Market segmentation helps an organisation to focus on exactly which segments they want to target with specific products, services or marketing campaigns. By doing so, the organisation can ensure they are targeting the right segment with the right product or message which will therefore enable the achievement of the greatest return on investment.
Market competitiveness can also be increased by focusing on specific market segments, which again should lead to increased return on investment. By focusing on specific segments and learning everything they need to know about that segment means that correct targeting is more likely and therefore customers will be more satisfied.
Improve marketing efficiency
By breaking down large customer groups into smaller groups makes it easier for organisations to manage customers and their target audience and therefore can design and tailor very specific marketing campaigns to the most relevant people, through the most relevant marketing channels. Less time will be wasted on mass marketing, which in most cases will be wasted on customers not interested in the organisation’s marketing message.
Using customer segmentation, organisations can quickly identify those customers which require extra attention, those that churn more frequently and those with will a high potential value. By developing targeted marketing strategies that capture specific customer groups attention and by creating positive experiences for each specific group, then it is far more likely that an organisation can maintain a strong relationship with customer groups and therefore retain them.
A strong awareness of customer segments is likely to be of critical importance to organisations in the future, due to the fast and ever moving environment, driven more and more by the internet economy. Survival for many organisations will require a greater focus on the identification of their own value to customers and the specific value of customers to the organisation.
Written by a member of the SBL examining team